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Halcon Resources Corp's Day of Reckoning Might Be Closer Than You Think

By Matthew DiLallo - Sep 22, 2015 at 9:35AM

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Halcon Resources Corp is making progress, but is it enough?

Halcon Resources Corp (HK) investors need to mark this date on their calendar: December 31, 2018. That's the date the company expects to survive through given its current liquidity. That said, the hope is that by that time oil prices will be much higher making it a moot point. However, if oil doesn't improve the company's day of reckoning could be much closer than the end of 2018 because its liquidity isn't quite as solid as the company boasts.

Some breathing room
Over the past year Halcon Resources has undertaken a handful of initiatives to improve its liquidity and remove debt from its balance sheet. These initiatives include raising equity, engaging in a debt-for-equity exchange, and issuing new debt to pay off its credit facility and buy back some of its senior notes. According to CFO Mark Mize,

The end result of these efforts is that we have no near-term maturities and we have sufficient liquidity to fund our operations and service our debt for years to come. We continue to look for ways to further strengthen our balance sheet as it relates to leverage and liquidity. We ended the second quarter with just over $900 million of liquidity and we can comfortably operate the company through 2018 at the current drilling pace with the current financial resources available to Halcon Resources. 

What Mize is saying is that Halcon Resources has crunched the numbers and it can survive through 2018 on $900 million plus the cash flow it expects to generate from its oil and gas wells. That cash will enable the company to fund its daily operations, drill new wells to at least keep its production flat, and pay the interest on its debt. That sounds great, however, there's just one problem. That $900 million number he mentioned could easily vanish well before 2018.

When liquidity isn't quite so solid
The reason its liquidity could dry up well before 2018 is because that liquidity consists almost entirely of the availability under the company's revolving credit facility. It's a borrowing base that the company's banks actually revisit each spring and fall, meaning they could theoretically reduce it a number of times between now and 2018 should oil remain weak. 

In fact, that number recently slipped to $850 million after the company's most recent debt refinance where it exchanged $1.02 billion in new 13% notes for $1.57 billion in lower yielding notes. This is because as part of the agreement the company also reduced its borrowing base by $50 million. Any future debt agreements could result in additional slices being taken out of its credit facility.

Further, while Halcon Resources expects that new $850 base to stick this fall during its regularly scheduled redetermination, there are no guarantees. There is a very real possibility that its banks could show it a cold shoulder this fall as analysts expect $10 billion in credit to be withdrawn from the oil patch with credit facilities seeing an average reduction of as much as 15%. Now, that doesn't necessarily mean that Halcon's will be cut as it probably has a good idea from its banks that the $850 number will stick. However, it can't be so sure that the number will stick this spring when its banks redetermine that number once again. If oil prices remain weak, and/or we have a rash of bankruptcies in the oil sector, there could be deep cuts in oil company credit lines next spring. That suggests that Halcon Resources can't really count on its bank credit line being a solid source of liquidity through 2018.

Investor takeaway
While Halcon Resources says it has enough liquidity to see it through the end of 2018, the primary source of that liquidity isn't quite so solid. That's because instead of being cold hard cash in the bank, Halcon is banking on its credit facility to fund it for the next few years. However, that borrowing base could be reduced twice each year if oil prices remain weak, shortening Halcon's time horizon. In other words, the company's day of reckoning could be much closer than the end of 2018 if oil prices continue to remain weak. 

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